Friday, December 29, 2017

The warning signs that a market crash is looming are becoming louder and more frequent. Despite this, most market participants are behaving like it can never happen. In fact, bullish trading is pushing the markets to new highs on an almost daily basis. The warnings are seen, heard and then ignored.

Join the few who will take advantage of what's about to happen. The same few who profited handsomely when billions were lost in the last global economic crisis almost a decade ago rather than those who simply follow the herd.

For most people these warnings are like the graphic images printed on today's packets of cigarettes, they spell out the dangers and yet all the same people are still smoking.

Warnings about an impending market crash are being made by people who predicted with considerable accuracy in 2006 and 2007 what was ahead when the US sub-prime mortgage market collapsed and triggered the global financial crisis.

The one thing these analysts can't predict is an exact time and place for when the crash will happen. It's the same reason people continue to smoke; nobody can say with certainty the number of cigarettes required to kill a person.

So, trading continues regardless until the day the sudden dramatic drop in prices exceeds the 10 per cent threshold that officially marks the point that the crash has arrived.

Just as smokers only decide to stop when the physician says: "Mr Smith, I regret to inform you that you have lung cancer."

Swiss investor Marc Faber, also known as "Dr Doom", predicts that stocks are set to plunge by 40 per cent or more. Mr Faber, the editor of 'The Gloom, Boom & Doom Report' recently told CNBC: "We have a bubble in everything."

His caution is echoed by Nobel Prize-winning economist Robert Professor Shiller who has urged investors to tread cautiously because market valuations are at "unusual highs".

In a recent interview with CNBC, he said: "We are at a high level, and it's concerning," highlighting that the only times valuations have been higher were in 1929 and 2000.

Mark Zandi is chief economist at Moody's Analytics. In August he joined the chorus of analysts preaching caution after determining that the stock market is overvalued.

In an article in Fortune he said: "The stock market is due for a significant correction" adding, "stock returns in the next several years will be very pedestrian if they increase at all."

Last month HSBC issued a Red alert warning. They're looking at two key levels: 17,992 in the Dow Jones Industrial Average and 2,116 in the S&P 500.

"As long as those levels remain intact, the bulls still have a slight hope. But should those levels break and the markets close below, which now seems more likely, it would be a clear sign that the bears have taken over and are starting to feast," said head of technical analysis Murray Gunn. "The possibility of a severe fall in the stock market is now very high," he added.

However, according to Bill Blain, a strategist at Mint Partners, this time bond markets will trigger the mayhem.

According to Blain, stock markets don't matter. "The truth is in bond markets. And that's where I'm looking for the dam to break. The great crash of 2018 is going to start in the deeper, darker depths of the credit market," he said.

"I'm convinced bond markets are the real bubble we should be watching, and it's going to start in high yield..."

Blain's opinion on a bonds inspired crash is echoed by Niall Ferguson in his piece in The Sunday Times this month.

Ferguson was warning about the sub-prime mortgage crisis over a year before the crash occurred. He spoke publicly about it on many occasions and in his book The Ascent of Money spelling out the dangers in graphic detail, which was published just as his predictions were coming true.

He sees a bonds sell off as a result of a series of events that will bring about the next economic crisis.

Ferguson firstly points to the effect of interest rate increases by the big four central banks -- the Fed, European Central Bank, Bank of Japan and Bank of England -- when the rate of economic expansion has already started to slow.

He explains: "History shows that monetary tightening acts with long and variable lags. But it does act, often on stock markets."

Ferguson also points to global wage and inflation increases as the second contributory factor as we approach a demographic inflection point where the ratio of workers to consumers has peaked.

This has led Ferguson to the conclusion that the end of the 35-year bond bull market is imminent. "Bonds will sell off; long-term rates will rise. The question is whether inflation will increase as much or more. If not, then real (inflation-adjusted) interest rates will rise, with serious implications for highly indebted entities."

He points to two big economies, China and Canada, which are in particular trouble. You should probably add Australia to that list given its level of connectedness to China.

Despite being described with the same words, no two financial crises are the same. The next one will differ from the last one, that's why they are so hard to put into an actionable timeframe. But the inevitability that there will be a next one increases as the monetary medication begins to be withdrawn, which makes the need for taking the right measures now all the more important.

FXB Trading's experts are equally convinced that a significant market correction is imminent. They've devised a strategy to profit from the situation as many notable forward-thinking analysts did ahead of the 2008 sub-prime mortgage crash in the US which then caused the subsequent global financial crisis.

In the 2008 scenario their investment returned ratios of between 1:10 to 1:20. FXB's traders will replicate the trade, but will also hedge their position.

Until the market crashed in 2008 those US traders were in a losing position, but by hedging it is possible to avoid losses until the crash occurs.

Monday, December 25, 2017

EconomPic had an interesting article about the standard deviation of a 60/40 equity fixed income portfolio having imploded during the bull market and included a great chart for a visual idea of what has occurred.

While I doubt there are any surprises here as you can’t go more than a couple of scrolls on your Twitter feed without seeing something about how low VIX is, it nonetheless raises some good talking points.

The first thing is capital markets are like pendulums with a lot of things. Foreign equities dramatically outperformed domestic in the 2000's. This decade, domestic is way ahead of foreign - until this year. Same thing with currencies, the dollar goes on long runs of outperformance, followed by long periods of underperformance and so on. Where volatility has been low and headed lower this year, it will at some point turn around and move higher. That is not a prediction that I am trying to game so much as an observation of how markets work and a reminder for practice management, take the time to remind clients that market cycles and volatility have not been repealed.

To that point John Hussman’s latest commentary is a doozy. He says that based on his study of valuations versus interest rates and a few other things, he believes that a 64% decline is coming to the S&P 500 (NYSEARCA:SPY) with the expectation that the next 10-12 years will offer negative returns.

If you know who John Hussman is, you know that he has been bearish all the way up. The way I always mention him is to say, he does a great job of framing the bear case, and that is what he is doing; valuations are out of whack given where interest rates are. He hasn’t really drawn the correct conclusion in that he positioned against the market rising and his flagship fund has suffered for it.

Saturday, December 16, 2017

Marc Faber discusses the very real risk that the world is facing. A total economic collapse. Central bankers are going to be the driving force behind this, and their ignorance is going to be our undoing. Get prepared.- Source